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Exchange rate dynamics and unconventional monetary policies: it�s all in the shadows

Author

Listed:
  • Andrea De Polis

    (Warwick Business School, University of Warwick)

  • Mario Pietrunti

    (Bank of Italy)

Abstract

In this paper we estimate an open economy New-Keynesian model to investigate the impact of unconventional monetary policies on the exchange rate, focusing on those adopted since the Global Financial Crisis in the euro area and in the United States. To this end we replace effective, short-term, interest rates with shadow rates, which provide a measure of the monetary stance when the former reach their effective lower bound. We find that since 2009 unconventional monetary policies significantly affected the dynamics of the euro-dollar exchange rate both in nominal and real terms: while the stimulus provided by the Fed prevailed between 2011 and 2014, contributing to the weakening of the dollar, in most recent years the depreciation of the euro mainly reflected the measures adopted by the ECB.

Suggested Citation

  • Andrea De Polis & Mario Pietrunti, 2019. "Exchange rate dynamics and unconventional monetary policies: it�s all in the shadows," Temi di discussione (Economic working papers) 1231, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1231_19
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    More about this item

    Keywords

    exchange rates; shadow rates; unconventional policies;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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